Heterogeneous Interacting Agent Models for Understanding Monetary Economies, Stiglitz/Gallegati

** In a nutshell, an understanding of why a bottom up approach would facilitate a more solid way to avoid
a financial crisis in the future. Stiglitz should have been one who Obama employed, instead we got Summers and Geithner.

Snip* Criticism of model used now: The model begins with assumptions that trivially lead to conclusions that there can be no unemployment or liquidity crises; how can such a model provide much insight into the economy's current predicament of high unemployment, or how it got there? This approach also has (by construction) nothing to say about the network aspects of lending and inter-bank linkages that have become apparent during the current crisis. Economic theory based on the RA model has, in short, nothing to say about financial crises, bankruptcies, domino's effects, systemic risk and any pathology in general. Any claim it might make about the efficiency of the market is suspect: it is a result of the extreme assumptions underlying the model.3

THE ALTERNATIVE: A HETEROGENEOUS AGENT-BASED APPROACH
There are alternative frameworks, still in their infancy, that provide a more promising research strategy for providing insights into what has happened in this and other crises. But this alternative framework is also useful in providing insights into the workings of the economy out of crises. Financial markets (lending and borrowing) are still central, and these can only be studied within a framework with heterogeneous agents. We believe a change of focus is necessary: an appropriate micro foundation that considers interaction at an agent-based level.

In a multi-agent framework with heterogeneous agents, the crisis is a phenomenon emerging from the microeconomic interaction. If the reductionist paradigm is applied, however, the deep understanding of the interplay between the micro and macro levels is ruled out, as well as any “pathological” problems, such as coordination failure. Only with such models can we make sense of what has come to the center of the policy debate today, the notion of systemic risk. Indeed, we might argue that the RA model is partly to blame for the crisis, for in those models, there is no such thing as systemic risk; policy makers, comforted by the notion that they were following “best practices” of the most advanced monetary theories in taming inflation, assuring the stability of the economy, paid no attention to the far more important issues of financial structure. In the straightjacket of this methodology, it is hardly surprising that the standard macro framework is without any help in understanding the current events.

Fortunately, over the past decade, there has been extensive research providing the foundations of a multi-agent approach focusing on credit linkages. Although this research has received scant attention within the mainstream , it has recently been the subject of intense interest by the Bank of England .

in full: http://www.palgrave-journals.com/eej/journal/v37/n1/full/eej201033a.html

I posted it as Stiglitz could offer our president a great deal of excellent advice.

i look forward to the day when the current narrative is dead.

but that will take a lot of people in the academy dying and retiring i think.

they are trying to model how the economy functions by using a dynamic simulation instead of a static collection of equations. The simulation consists of a number of discrete behavioral entities (the agents), and since the are not all the same in the simulation the are heterogenous agents (ie different). The agents will each represent a particular aspect of the economy. The neat thing about such simultions is that rules/behavior 'emerges' from the interaction of the agents, which wasn't present in any of the indivudual agents. A non economy toy example is 'BOIDS' (http://www.red3d.com/cwr/boids/)

Or something like that.

What does this have to do with the economy?

(te he he he)